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The half-year results released over the last few weeks were the last significant scheduled opportunity for insurers to provide more detail on their likely Solvency II capital positions before the regime takes effect. However, they made a point of not divulging Solvency II metrics - a sensible approach, as regulatory conclusions on companies' internal models are not due until December. This may have disappointed investors hoping for detailed guidance, but despite the lack of hard numbers, other factors suggest initial Solvency II capital levels are likely to be strong.
These factors include the Prudential Regulation Authority's recent emphasis that transitional benefits are a valid part of the Solvency II regime and should be considered as capital, including when insurers assess their capacity for paying dividends to shareholders. The major insurers announced substantial interim dividend increases with their results. This is consistent with their growth in cash generation. But given their conservative approach to capital management, we do not believe these increases would have been announced if there had still been significant uncertainty over likely Solvency II capital levels.
Solvency II requirements are significantly less onerous than initially planned, notably through the introduction of the matching adjustment, which reduces asset charges on illiquid assets held to back annuities, and through transitional arrangements, which phase in the new requirements over many years. It is clear that many insurers will take advantage of the transitional measures, even if they would have a strong capital position without them.
Fitch will continue to focus on their own Prism factor-based capital model (Prism FBM) for their primary assessment of insurers' capital adequacy. Under this risk-based approach Fitch would expect an insurer achieving a particular Solvency II coverage ratio with transitional measures to have a lower Prism score than one achieving the same ratio without transitional measures.